Cambodia's textile industry faces Vietnamese threat
PHNOM PENH - The Cambodian garment industry has developed into
a bastion of Cambodia's economy, accounting for most local exports in
1999. But other industries have been slow to take off, and the very
nature of clothing manufacturing - which relies on inexpensive labor and
requires little capital investment - has some people worried.
They are concerned about the nation's over-dependence on an industry
that may be looking for greener pastures, particularly Vietnam, in light of
the US bilateral trade agreement due for ratification this year.
When Cambodia opened its borders to foreign capital in the early 1990s,
international investors were hardly enthusiastic. Three decades of warfare
had left the country with primitive infrastructure, security problems,
rampant corruption, an unstable government and no business regulatory
framework. But garment makers saw opportunity in Cambodia's
inexpensive workforce, a primary consideration for this labor-intensive
industry, and the small capital required to set up shop meant that the pain
of any quick departure would be minimal.
The first maker set up operations on the outskirts of Phnom Penh in
1992, employing just 200 workers. Initial growth was slow, but Ministry
of Commerce figures show that the industry began taking off in 1995,
when exports hit US$25 million. That figure reached $79 million in 1996,
$127 million in 1997, $392 million in 1998, and topped US$600 million
in 1999 - 90 percent of total Cambodian exports that year.
The Cambodian Garment Manufacturers Association now boasts some
217 members, most of whom are Taiwanese, Chinese, and Korean
contractors making textiles for well-known brands such as The Gap and
Nike. The bulk of their output is exported for sale to the US and
European markets.
Employment has swelled to more than 150,000 workers - 1.3 percent of
the national population of 11.2 million, according to Care Cambodia
figures. Most of these workers are young women from rural areas, for
whom a job in a garment factory is the best alternative to subsistence
farming or prostitution in Cambodia's sex industry. The official minimum
monthly wage for garment workers is $45.
But Ministry of Commerce officials, despite claiming annualized growth
of 38 percent in direct foreign investment in the garment industry during
the January to September 2000 period, are publicly worried about its
future in Cambodia. Perhaps they should be. Cambodia weathered the
1997 Asian meltdown with relative ease, due in part to paltry foreign
investment before the crisis, but also because widespread use of the US
dollar made its economy less susceptible to currency fluctuations.
However, a dollarized economy makes Cambodia more expensive
compared to other Southeast Asian countries with significantly devalued
currencies.
Analysts say that hourly production wages in Cambodia are now $0.28,
compared to $0.24 in nearby Vietnam, a difference that alone might not
be enough of an incentive to move operations. They note that Myanmar
and Laos are even cheaper, with labor costs of just $0.08 per hour, but
these countries are not seen as the main threat.
It is Vietnam that has a network of good roads and dependable
electricity, still lacking in Cambodia, and the workforce there is seen as
better-educated and more productive. More fundamentally, the
US-Vietnam bilateral trade agreement, which would lower tariffs
between the two sides and is currently awaiting ratification by the US
Congress, is likely to hit the Cambodian garment industry hard.
Vietnamese garment exporters are anxiously awaiting the ratification of
the agreement, their industry currently suffers crippling US import tariffs
ranging from 48 percent to 90 percent. The crucial stumbling block is the
negotiation of quotas. This is a major worry for Vietnam's textile sector,
one which was expected to head the charge into the lucrative US market,
once the pact came into force. However, preliminary contact on quotas
has been made, with negotiations on a bilateral textile and apparel
agreement expected to begin in the near future.
Vietnam also hopes to join the World Trade Organization, which would
nullify any textile agreement with the US, replacing it with the Agreement
on Textiles and Clothing, which phases out all quotas by 2005. But
unfortunately for Vietnam's textile exporters, the country's bid to join the
WTO is rather more long term than 2005.
Nevertheless, the threat to Cambodia's market is very real, the reduction
of tariff rates on Vietnamese goods to below 10 percent will significantly
boost the appeal of domestic manufacturing businesses targeting the US
market. Ironically the experience of Cambodia is a good yardstick to
measure the potential of Vietnam when the bilateral agreement is ratified.
In the one-year "window" from 1996, during which Cambodia received
Normalization of Trade Relations (NTR) status and the US imposed
quota on imports of Cambodian textiles and garments under the
subsequent bilateral textile agreement, exports to the US witnessed an
explosion, soaring from around $2 million per year to $100 million per
annum.
The World Bank has bad news for the Cambodian industry, it estimates
that Vietnam's clothing exports to the US will rocket by a factor of 16
from a 1996 level of $25.6 million to $409.6 million a year after the
agreement is ratified. There are optimistic assessments that the US will
eventually outstrip either the European Union or Japan as the largest
market for Vietnamese exports of textiles and garments. Though
everything rests on the final form the bilateral agreement on textiles and
garments takes, Cambodia will be nervously looking over its shoulder at
Vietnam.
Vietnam's government is bullish about the prospects, exports to the US
should reach $800 million next year and could grow to $3 billion by
2005, according to the Deputy Director of the Import-Export
Department of the Trade Ministry Tran Quoc Khanh. He added that
exports of footwear are expect to almost double in 2002 to $200 million,
while garment and textile exports are also forecast to double from $50
million in 2001 to $100 million in 2002.
Investors now have choices in Southeast Asia," says a Taiwanese
manager of a garment plant in Phnom Penh. "New investors are leaning
toward Vietnam, for plenty of good reasons." Of course there are public
relations complications for Western companies that would make it
difficult for them to pull out of Cambodia, which is very much in the
international spotlight. But a recent BBC program accusing Nike and
Gap of exploiting child labor in Cambodia may have provided such firms
with moral ammunition to abandon their Cambodian contractors.
The program, which aired in October 2000, showed that some
employees of garment contractors in Cambodia are less than 18 years of
age. The program has been followed by job losses for garment workers
in Phnom Penh as Western firms seek to avoid another PR disaster. "Our
current contract expires in June, and we have already been told that it
won't be renewed," one plant manager says. "Nobody knows how many
jobs are going to be lost."
However, the legal working age in Cambodia was lowered from 18 to
15 in 1999. According to government statistics, only 280 garment
workers, or 0.19 percent of the sector's total, are between 15 and 17
years of age. But many young women have no choice but to lie about
their age as they are expected to earn money for their families. According
to the World Bank, only 30 percent of girls were enrolled in secondary
school in 1995, the most recent statistics. "The BBC should come back
next year to report on former underage garment laborers now working as
underage prostitutes," said one expatriate NGO volunteer.
Ironically, child labor is not seen as a serious problem here. Within days
of the BBC broadcast, the US increased Cambodia's garment quota to
nine percent, based on the US Department of Labor's assessment that
working conditions had improved. But economics rather than morality
are likely to carry the day on the issue, with Vietnam seen as a more
attractive location.
Cambodia's best hope of staving off that threat is to join the World
Trade Organization. According to the Ministry of Commerce, if
Cambodia can gain WTO entry by 2005, it will not be subject to
garment quotas from other members. Any later than that and Western
countries will still be able to impose unilateral quotas on Cambodian
textiles, severely damaging the garment industry - and the nation's tiny
economy.
Asia Times - March 9, 2001.
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